I've heard Colonization has terribly flawed game mechanics. For example, if you actually choose to build up your economy and build a strong colony, it becomes almost impossible to win because the Royal Army gets stronger and it becomes much harder for you to revolt. The best way to win, so I'm told, is to build a pathetic economy with a decent army and revolt before the royal army has time to get any strength.
Is this true? I really want the game (love the setting) but wouldn't want to have to trash my economy to win. If there's been a patch for it that would be good too.

Yes, the game actively discourages colonization. To win, you have to avoid everything fun about the game to focus on being a tiny war machine that can rebel as quickly as possible. Also, to a great extent, there is very little strategy involved. The AI is weak, and the designers just tried to make up for that by giving it a huge numbers advantage. The end result is a game that, if you play to win, forces you to follow a very strict and boring path. To say the least, for those of us familiar with the original, it's incredibly lame the first time you play a perfect game only to realize that playing WELL and establishing a powerful colonial empire makes it impossible to win.